What does the OPEC quota disagreement mean for Brent crude prices?

The oil market faced a hiccup this week after OPEC+ decided to postpone its regular meeting because member countries couldn’t agree on further cutting of production. Now as the end of the week approaches oil is in a holding pattern, awaiting further OPEC news.

What happened at OPEC and why is this likely to be supportive for the oil price?

At their meeting in June OPEC countries and the extended group of oil producers who are not technically part of the cartel, including Russia, had a fierce debate over how much to reduce their oil output by, to prop up sliding prices (Brent crude is trading around $79 a barrel from this year’s high of $98/bbl).

While heavy weights Saudi Arabia and Russia were in favour of a deeper cut, for some of the smaller producers the income loss associated with lower production was a serious stumbling block. To spread the cuts across OPEC+ countries each member was given a new reference production level. For some, like Iraq, Kuwait and Algeria, the levels remained the same as last year, while countries that have not adhered to their targets for several years had their reference levels cut: Nigeria by 0.362%, Angola by 0.175% and Congo by 0.034%.

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Non-OPEC producers like Azerbaijan, Bahrain, Kazakhstan, Malaysia and Mexico were also given mostly lower reference levels, with the largest reduction of 0.5% borne by Russia. To ensure compliance OPEC asked consultancies Wood Mackenzie, Rystad and IHS to monitor production levels and to report at the cartel’s next meeting – in November.

Here is where the wrangling began. The agencies have submitted their findings but Nigeria, Congo and Angola, the three countries that have opposed the cuts at the June meeting, are contesting them. As oil diplomacy continues behind closed doors Saudi Arabia will keep the pressure up on “wayward” producers.

The China factor

When assessing the size of the production cut OPEC+ is trying to balance out its output with predicted demand. There are several different theories out there on what demand will be doing next year.

The International Energy Agency is forecasting that the market will be in surplus, arguing that demand is slowing drastically. That does not tally with the predictions for a recovery in the US market, the world’s biggest consumer of oil. Latest US data suggests that the country will go through a soft landing without tipping into recession next year. Similarly, while Europe’s economic growth is still stunted, that demand is not shrinking.

Which brings us to China. We at the Armchair Trader have a contrarian view on the role Chinese demand will play next year. While most analysts are disparaging about Chinese demand, we think that, given expectations for China’s economic growth and some stimulus measures brought in by the government, demand will be good enough to keep the oil market supported.

It is true that China’s GDP predictions are nowhere near what they had been in the last 20 years, but China’s base line demand is now at a much higher level and even at a slower rate of growth China will comfortably account for a quarter of all global oil consumption.

China’s net zero target is further out than the ones in Europe or the UK; the country is aiming to reach it by 2060. That doesn’t suggest a slowdown in the use of petrol despite a booming electric vehicle industry.

Given how many times in the last 24 months OPEC has decided to curtail production, or prolong production cuts that are already in place, it seems likely that a weakness in the oil price will not be in place for long.

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